U.S. lawmakers weigh in on banks' side in Volcker dispute

WASHINGTON (Reuters) - Several U.S. lawmakers waded into a squabble between small banks and their regulators this week, supporting the companies' efforts to scale back the so-called Volcker rule which restricts banks' ability to make bets with their own money.

Two Republicans in the U.S. House of Representatives on Wednesday introduced a bill to change the recently finalized rule so that banks would not have to dump certain investments backed by trust-preferred securities. These have hybrid characteristics of debt and equity and can get favorable tax treatment.

They followed 22 House Democrats, who in a letter dated Tuesday argued that financial regulators should exempt banks with less than $15 billion in assets from a portion of the rule related to the so-called TruPS.

The Volcker rule, which was required by the 2010 Dodd-Frank law and was approved by regulators in December, restricts banks' ability to make bets with their own money and limits their investments in certain funds.

After the rule was finalized, bank groups said it would force small firms to sell debt holdings backed by TruPS, which could result in losses for the banks.

The American Bankers Association, a trade group, sued the Federal Deposit Insurance Corp, Office of the Comptroller of the Currency and Federal Reserve to force them to address what the banks said was an unintended and unfair consequence of the Volcker rule.

The regulators have since said they are considering tweaking the rule.

Republicans Jeb Hensarling of Texas, who is chairman of the House financial services panel, and Shelley Moore Capito of West Virginia said their bill would allow banks to keep any debt holdings backed by TruPS that were issued before the Volcker rule was finalized.

The group of Democrats, including Representative Maxine Waters of California, said regulators should exempt small banks from the requirement because Congress intended for those firms to be treated differently.

"Implementation of the Volcker rule may be inconsistent with Congress's intention for treatment of these specific investments," the letter said.